DBRS Confirms Superior Plus LP Ratings with Stable Trends

DBRS Limited (DBRS) confirmed the Issuer Rating of Superior Plus LP (Superior Plus or the Company) at BB (high) and the Senior Unsecured Debentures rating at BB. The trend on all ratings remains Stable. The ratings confirmations reflect DBRS’s expectation that Superior Plus’s leverage will return to a level commensurate with the current ratings in the near term, following an uptick driven by the recent acquisition of retail propane assets in the eastern United States (NGL Retail East) as well as five smaller tuck-in acquisitions so far in 2018. The ratings confirmations are also driven by the Company’s proven track record of successfully integrating acquisitions and its relative similarity in terms of business model and geography as well as its leading position in the Canadian propane distribution market.

On July 10, 2018, Superior Plus closed the previously announced acquisition of NGL Retail East for a total consideration of about USD 900 million. The acquisition price was funded through a mix of debt and equity, such that leverage will temporarily increase at year-end 2018 with adjusted debt-to-EBITDA increasing to well above 4.0 times (x) and cash flow-to-debt declining to below 20%, due to the amount of new debt incurred and the lag in earnings and cash flow contribution from the acquired assets. However, DBRS expects that in the near term leverage metrics will moderate back to a level more aligned with the current ratings (adjusted debt-to-EBITDA below 4.0x and cash flow-to-debt above 20%) as the acquired assets contribute a full year of earnings. In addition to its proven track record of successfully integrating acquisitions, the Company has also shown in the past that it can improve leverage in a relatively short time frame. The Company is also executing on a number of smaller tuck-in acquisitions, mostly in the United States, funded through revolver drawings and which help the Company execute its strategy to grow into the higher-margin retail propane market. Furthermore, Superior Plus has been active in exiting the lower-margin wholesale refined fuel business through dispositions, marking a clear strategic shift.

The ratings remain well-supported by Superior Plus’s excellent brand strength and reputation for outstanding customer service. The importance of the Company’s propane and chemical products to clients and the relatively well-diversified customer base helps to ensure a steady level of demand for Superior Plus’s products. The economic drivers of propane demand are generally different from those underlying demand for the Company’s Specialty Chemicals products, offering some diversification benefits over the long term. The ratings are also supported by the Company’s position as a leading distributor of propane in Canada and its emergence as a significant player in the northeastern U.S. propane market. Challenges include external factors beyond the Company’s control, such as seasonal and cyclical drivers in its end markets and volatile raw materials costs in the specialty chemicals business, which have the potential to have a negative impact on earnings and cash flow. The fragmented nature of the propane distribution market and the financial and integration risks associated with the Company’s current acquisition strategy are also structural challenges.

Overall, the operating performance and business risk profile continue to support the current ratings. DBRS expects the Company to remain acquisitive and, given the fragmented nature of the propane distribution sector, there is no shortage of tuck-in acquisition targets available. However, if in 2019 leverage metrics do not improve to levels commensurate with the ratings, driven by significant debt-financed acquisitions especially during a period of notable market weakness, negative free cash flow or difficulties and delays in integrating newly acquired businesses, a negative rating action could be considered. A positive rating action would likely only be considered if the Company demonstrated a commitment to a materially stronger financial profile over a period of years.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Industrial Products Industry and Rating Companies in the Services Industry, which can be found on dbrs.com under Methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

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